Tensions rise over refining

Union warnings that closing
Caltex
’s refineries will endanger energy security are being dismissed by analysts as ill-informed given Australia’s already heavy reliance on crude oil imports from as far afield as West Africa.

Caltex, the country’s largest oil refinery, is due to decide by August the fate of its two plants, in Sydney and Brisbane. Chief executive
Julian Segal
has said outright closure is one option as he seeks to curb heavy losses in the business that reached $208 million last year.

Last year, Royal Dutch Shell decided to convert its Clyde plant in Sydney to an import terminal by mid-2013 while, in 2003, ExxonMobil mothballed its refinery in Adelaide. Closure of both Caltex plants and Shell’s Sydney refinery would cut Australia’s production capacity for petrol, diesel and jet fuel by more than 40 per cent, making the country more reliant on fuel imports from Asia.

The Australian Workers’ Union has submitted a research paper to Resources and Energy Minister
Martin Ferguson
describing any reduction in domestic refining capacity as “hugely dangerous" because it would expose the economy to external shocks in the global supply of crude oil.

But some analysts don’t agree, pointing out that Australia is already heavily reliant on crude from unstable regions in West Africa and the Middle East.

“The fact is that 80 per cent of the crude that gets refined through Australian refineries is imported," said CLSA analyst Mark Samter. “If you are getting crude in many cases from West Africa, or product from Singapore and Korea, which one is the bigger potential geopolitical risk? There is actually more risk on your crude imports than there is on the product imports."

Australia’s refining industry has long struggled with the legacy of old, relatively small plants which have become increasingly uncompetitive as mega-refineries have begun production in China and India. India’s Reliance Industries’ refineries at Jamnagar are almost double the size of Australia’s total capacity.

The dollar’s strength has added to the industry’s problems and sparked speculation that the future of other plants – owned by ExxonMobil, BP and Shell – must also be in doubt. But Mr Samter said he expected further rationalisation would drive marketers to keep bigger inventories, reducing the overall risk of supply disruptions.

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Goldman Sachs agreed that further refinery closures are likely in the next several years but pointed to a risk of declining earnings in Caltex’s marketing business should it cut its refining capacity. Caltex’s 50-per-cent owner Chevron, however, owns refining capacity in South Korea, Thailand and Singapore, offering potential for a secure supply deal.

More than one quarter of Australia’s refined fuel is imported, some to northern and north-west regions which are more economic to supply directly from Asia, according to the Australian Institute of Petroleum. It expects Australia’s liquid fuel security to stay high, helped by existing and forecast excess supply in the region.

The government appears to agree, given its comments in the Draft Energy White Paper, released in December, which noted the growing proportion of imports but stated that ready access to open and well-functioning international markets meant fuel security was not at risk.

“A lack of oil self-sufficiency does not in itself compromise or reduce Australia’s energy security," the paper said. It warned that pursuing self-sufficiency in fuels could impose “unnecessary higher costs" on consumers without material economic or strategic benefit.

Goldman Sachs said a reduction in refining capacity would likely encourage more independent fuel distributors to supply retail and small commercial customers, but many larger customers may still want to stay with majors with local production capacity to reduce risk.